The market seems at times to support hundreds of little oil and gas companies, and few of them ever really stand out. But Rex Energy Corp. (NASDAQ:REXX) caught the attention of my model this month and really has proven that it is special.
REXX is an integrated energy company primarily engaged in the production, exploration and development of oil and natural gas. Its headquarters is in State College, Pa., but its operations are in Illinois, the Appalachian Mountains and the Denver-Julesburg Basin in eastern Colorado.
REXX is in many ways a typical “upstream” oil and gas company, which means it explores and drills for oil and natural gas. Rex then markets and sells those findings to “downstream” firms such as refineries and petrochemical plants that are engaged in refining this oil and gas into consumer usable products.
Rex has a total of 266,878 gross acres of land currently producing nearly 23,000 cubic feet of gas per day. What’s important to know is that at $700 million in market cap, it still is a relatively small and young company, having been founded in 2007, and thus still is in an early growth stage.
Click to Enlarge That’s good for us, because that growth has been phenomenal. Rex has experienced 25% annual revenue growth since 2007 and is on pace to achieve five consecutive quarters of double-digit growth in oil and gas production.
This successful start is a result of a very focused business strategy that has allowed Rex to achieve a drilling success rate of approximately 98% during the past three years, while also improving operating efficiencies.
This growth, however, has not led to increased risks, as management remains engaged in a sophisticated hedging process to reduce volatility in oil and natural gas prices. The company successfully hedged more than 90% of expected 2012 oil production and 60% of its expected natural gas production.
By trading in the futures contracts of oil and natural gas, Rex is able to set a floor and ceiling for the prices on the oil and natural gas it produces during the next two years. It helps to stabilize revenues from quarter to quarter and give both management and investors greater visibility into earnings expectations.
Thomas Stabley was appointed chief executive in October after previously serving as the firm’s finance chief since inception five years ago.
Typically, the biggest concern with a young growth company is ensuring it doesn’t run of cash before it can turn a profit. Think of the many technology companies that went up in flames during the tech bubble because they never had any real earnings.
Well, Rex’s profits turned positive at the end of 2010 and ended the most recent quarter with $10 million in cash and $86 million of available borrowing capacity on its revolving credit facility for a total of $96 million in liquidity. The impressive asset base and proven growth led its banking group to raise its credit facility by 50% from $160 million to $240 million just last quarter.
Recent quarterly results continue to impress as total revenues increased to $32.4 million, up 90% from a year ago and exceeding its third-quarter production goals, which were up 24% from this time last year.
As is typical of an early growth company, Rex trades at 18.5 times consensus 2013 earnings expectations, which is higher than its peers.
REXX’s stock price is up close to 35% in the past six months as it continues to draw more attention from the investing public, but this story still is in the early stages. It’s a buy under $16.
For more guidance like this, check out Markman’s daily trading service, Trader’s Advantage, or his long-term investment service, Strategic Advantage.
